Misplaced Confidence: Catastrophes in Forecasting

Expert or not, humans alone simply aren't good at thinking about the probabilities and, worse yet, they don't know it.

Prior to the disastrous launch of the Challenger space shuttle, NASA estimated the risk of a catastrophic failure on launch to be 1-in-100,000.

Two months before the nuclear disaster at Chernobyl, Ukraine’s Minister of Power and Electrification said that“the odds of a meltdown are on in 10,000 years.”

Clearly, those guys were putting too much confidence in their ability to forecast. Many commodities-driven companies, even those with advanced internal forecasting capabilities, are subject to catastrophic losses stemming from overconfidence in their forecast accuracy.

When it comes to forecasting, the more sure you are of something, the less likely you are to be right. What does this imply for a business leader?

When your forecaster says they are ‘sure’ about a forecast, take it with a grain of salt, or better yet, consider the record of their previous forecasts. In this white paper you will find: